The Type of Stocks to Put on Your Christmas Wish List

The ASX opened down around 20 points this morning. It should be down a lot more, but Orwell’s Department of Truth sprang into action. Both Qantas and QBE shares are in a trading halt because of expected downgrades to profit expectations.

The Australian stock market had a rough November too, finishing down about 4%. But daily and monthly news are hardly important compared to the fact that we first reached the 5200 mark in the ASX200 back in mid 2006. Stocks have been treading water for our entire adult life!

Of course, that’s not a very good description of what’s been going on. It’s been more like ‘treading water in the middle of the Atlantic during a storm’. There have been crashes and rallies over the last 7 years. Plenty of opportunities to make and lose money. But in the end, it was all for naught.

‘Buy and hold’ investment advice now has a third feature: ‘Buy, hold, and keep working for another few years before you can retire.’

Paying a financial advisor to tell you to keep working isn’t a great state of affairs. It’s much better to get paid. And that’s why dividend investors are sitting pretty right now. They’ve had a decent couple of years collecting cash and then seeing their trusty cash cows bid up on the market as other investors caught onto the ‘reach for yield’, or ‘income trend’ as we called it. That’s when lower interest rates send investors looking for dividend return, which bids up the shares that pay them.

And the investors who used the additional little twist from the first issue of The Money for Life Letter would be even better off, having accumulated even more shares.

But it’s the ‘why’ that the DailyReckoning likes to ponder most of all. Why are stocks going nowhere? Well right now the narrative is all about the ‘taper’ and the good news/bad news conundrum.

The story goes that any good news increases the chance of the Federal Reserve reducing stimulus. So when American third quarter GDP was revised upwards to 3.6% (annualised) yesterday US time, the stock market fell. Good news is bad news. The Service Sector ISM, which measures economic activity in the services sector, disappointed expectations – and the market jumped. Bad news is good news. And the unemployment claims figure was better than expected, sending the market falling. You get the idea.

That narrative makes a lot of sense in the short run. But it doesn’t make any sense at all over longer periods of time. Bad news has to be bad news for stocks eventually. Central banks can only suspend normality and reality for so long.

So what about the bit in between the long run and the short run? How do we return to normality? Will stocks soar to reflect the good news which has been keeping the market suppressed, or will stocks tumble on the bad news which has kept the market up?

Yes it’s bizarre and confusing. But it’s also important. If the market is headed higher when reality strikes, can you afford to sit out? Vern Gowdie at Gowdie Family Wealth answers that question with an emphatic ‘yes’. Largely because he thinks an initial crash is far more likely when reality sets in. And that could be the buying opportunity of a lifetime for those with cash ready and waiting.

There’s another way of looking at all this. Unfortunately, it makes life even more difficult for investors who want to be active and trade market developments over the next few years. But we’ll give it a whirl anyway:

Short term fluctuations like those on GDP revisions and unemployment data aside, what if the narrative about the stock market is wrong altogether? What if it isn’t about tapering of stimulus at all?

This is a point that Discordians like to make. Never mind what a Discordian is, it’s just that some of their ideas are useful. And one of the ideas is that humans apply a narrative to facts that allow those facts to make sense, and make the lessons you can draw from them easy to remember.

The sun rises and sets each day. Therefore, a sun god called Helios must be pulling it with a chariot. That might seem a bit ridiculous, but because of the way the human memory works, it’s easier to remember which way is east and west if you know the story of Helios.

‘Helios dwelt in a golden palace located in the River Okeanos at the eastern ends of the earth. From there he emerged each dawn driving a chariot drawn by four, fiery winged steeds and crowned with the aureole of the sun. When he reached the land of the Hesperides (Evenings) in the West he descended into a golden cup which carried him around the northern streams of Okeanos back to his rising place in the East.’

Now that you know the story, try forgetting which way is east and west. Much better than ‘never eat shredded wheat’ right? (That’s a rhyme to remember the directions of North, East, South and West in the same order as a clock’s hands turn, which is only helpful if you have a clock, which people didn’t in ancient Greece.) You also know where the River Okeanos and the land of Hesperides is too.

So what if the good news/bad news narrative is a fictional story too? Apologies to any pagan readers, we’re just trying to make a point. What if the stock market’s moves are just a confusing mess we are trying to makes sense of by applying a false narrative? What if they’re really driven by randomness, or as Discordians would say chaos?

In that case, the conclusion is clear. And it’s the same one we started out with. Buy dividend paying stocks. After all, cash is very real.

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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